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Virgin scarred by battle with Qantas

Matt O'Sullivan

Virgin Australia has suffered a more than halving of its first-half profit as it bares the brunt of a battle for passengers with Qantas in the domestic travel market.

Australia’s second-largest airline reported a net profit after tax of $23 million for the six months to December, down from almost $52 million previously, despite a 5 per cent lift in revenue.

Virgin has not given earnings guidance for the second half because of ‘‘uncertainty in economic conditions and the competitive environment’’.

Using the market’s preferred metric, Virgin’s underlying profit before tax fell to $61 million for the half – down from $91 million previously – which was below below analyst expectations.

Shares were down 2.3 per cent to 42.5 cents in early trade.

Unlike the first half in 2011-12, the airline did not have an earnings boost from the impact of industrial action at Qantas. It also faced a $24 million bill from the carbon tax in the latest half.

The airline’s domestic operations posted pre-tax earnings of $49 million for the half, down from $87 million previously, as it faced heavy discounting of fares because of a capacity glut.

An 11 per cent rise in capacity in the domestic market in the first half was the biggest increase since the launch of Jetstar in 2004.

But its international operations boosted earnings by 9 per cent to $35 million as it began to reap the benefits of its alliances with airlines including Etihad and Singapore Airlines.

Virgin’s chief executive, John Borghetti, said the airline had delivered a solid result ‘‘considering the aggressive competition and challenging economic environment’’.

The airline has been locked in a battle with Qantas for lucrative business passengers for the last year. Last week, Qantas said it had an 84 per cent share of the corporate travel market.

Mr Borghetti said Virgin had continued to grow its share of the corporate travel market, and ‘‘maintained the new norm’’ in which more than 20 per cent of its revenue came from the higher-yielding segment.

Virgin plans to boost capacity in the domestic market by 5 to 7 per cent in the second half. The airline will increase flights between Brisbane and Perth from May using wide-body Airbus A330 planes, and also begin flying between the sunshine state’s capital and both Moranbah and Bundaberg.

It has not declared a dividend for the half.

Qantas has indicated that the capacity glut in the domestic market has eased since January. But both it and Jetstar plan to boost capacity in the domestic market by 5 per cent to 7 per cent in the second half, albeit a a reduction from the growth levels in the first half.

Qantas has promised to step up its battle with Virgin by upgrading its fleet of large A330 aircraft – most of which will be used to fly between the east coast and Perth – and ordering new planes.

Virgin is also awaiting a decision on March 14 from the competition regulator about whether to approve its bid to take a controlling stake in Tiger Australia. The purchase is aimed at giving Virgin its own dual-brand strategy to counter Qantas and its budget offshoot, Jetstar.

The Australian Competition and Consumer Commission has indicated it has reservations about the deal, but analysts expect it to eventually approve the bid.